2022 (4) TMI 176 - AT - Income Tax

Addition u/s 2(22)(e) - deemed dividend - transfer of funds was between the companies on the direction of the Director - Substantial Share Holding - Before the Ld. CIT(A) it was inter alia submitted that the assessee had not paid but on the contrary it had received the sum from shareholder/director during the relevant year and therefore the provisions of section 2(22)(e) were not triggered. - HELD THAT - CIT(A) after considering the submissions of the assessee the bank account the ledger account of the loan balances in the books of the assessee as well as the related company has given a finding that the transaction involved was not in the nature of loan from M/s. Samara India Private Limited to assessee but rather it was a loan transaction between Shri Rajnish Wadhwan and the assessee wherein the funds were transferred on his direction from his loan account with M/s. Samara India Private Limited to the assessee company and therefore the provisions of section 2(22)(e) of the Income Tax Act 1961 are not applicable. Before us no fallacy in the findings of the Ld. CIT(A) has been pointed out by the Revenue. In such circumstances we find no reason to interfere with the order of the Ld. CIT(A) and thus Ground No.1 of Revenue is dismissed. Disallowances u/s 40A(2) - assessee had availed loans from Punjab and Sind Bank at an interest rate of 9.56% whereas it was paying interest at the rate of 16.34% on the loans availed from M/s. Samara Automax Private Limited a related party - HELD THAT - It is a well-known fact that the interest charged on unsecured loans are higher than the interest charged on secured loans in view of the fact that secured loans as the name suggests are secured and are generally secured either by a mortgage or hypothecation of certain properties whereas on the other hand unsecured loans are not secured and therefore the lender carries much more risk and therefore the rates at which the amount lent on secured loans are lower than the rates at which the unsecured loans are lent. Before us the Learned AR has pointed to the State Bank of India Benchmark Prime lending rate to be in the range of 14.5% to 15% for secured loans. We further find that before CIT(A) assessee with the support of data available on SBI website and stated that the benchmarking rate for secured loans was in the range of 14.45% to 14.75%. The aforesaid fact has not been converted by the Revenue. Revenue has not placed any material on record to demonstrate that the benchmarking rate of unsecured loan by the bank was lower than the rate at which the assessee has been lent money. In view of the totality of the aforesaid facts we are the view that the interest rate which has been charged to assessee by M/s. Samara Automax Private Limited at 16.34% cannot be considered to be excessive. Further Revenue has not placed any material on record to demonstrate the comparative rate charged in the open market on similar unsecured loans. We are thus of the view that no addition under section 40A(2) is called for in the present case. We thus direct the A.O. to delete the addition. Ground No.2 of the appeal of the Revenue is dismissed. Addition u/s 68 - unexplained cash credit - creditworthiness of the parties by explaining their source for giving the loans proved or not? - CIT-A deleted the addition - HELD THAT - Assessee has discharged his onus of proving the identity creditworthiness and the genuineness of the transaction and thus no addition could be made under section 68 of the Income Tax Act 1961. Before us no fallacy in the findings of the Ld. CIT(A) is pointed-out by the Revenue. In such circumstances we find no reason to interfere with the order of the Ld. CIT(A) on this issue and thus Grounds No.3 of the Revenue is dismissed. Addition being interest expenses holding it to be capital in nature - since assessee was in the business of renting out of property and no rent has been generated out of these properties for which capital advance has been given therefore the interest payment as revenue expenditure cannot be allowed as it was capital in nature - CIT-A deleted the addition - HELD THAT - CIT(A) while deleting the addition has given a finding that the business of the assessee is in trading in real estate and renting the properties since 1996 and the funds obtained through overdraft as working capital or through unsecured loan was deployed for the purpose of business and extending the advances for booking of property s was in the line of its business activity and that mere non-recognition of rental income cannot be the basis for allowing expenditure when the utilisation of fund is established for business purposes. He further noted that on identical facts in assessee s own case for the A.Y. 2012-13 the Ld. CIT(A) had deleted the addition. He noted that since there are no change no change in the facts and circumstances of the case as compared to A.Y. 2012-13 he following the order of his predecessor for the A.Y. 2012-13 deleted the addition made by the A.O. Before us no fallacy in the findings of CIT(A) has been pointed out by the Revenue.

Summary

Issues Involved:
1. Deletion of addition under section 2(22)(e) of the Income Tax Act, 1961.
2. Deletion of disallowance under section 40A(2) of the Income Tax Act, 1961.
3. Deletion of addition under section 68 of the Income Tax Act, 1961.
4. Deletion of addition of interest expenses treated as capital expenditure by AO.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 2(22)(e)
- Facts: The AO observed that the assessee received funds from M/s Samara India Pvt. Ltd., and considered it as deemed dividend under section 2(22)(e). The assessee argued that the transaction was directed by Shri Rajnish Wadhwan, who had an outstanding loan receivable from M/s Samara India Pvt. Ltd.
- CIT(A) Decision: The CIT(A) found that the funds were transferred under the instructions of Shri Rajnish Wadhwan through his loan account, and thus, the transaction was between Shri Rajnish Wadhwan and the assessee, not between the companies.
- Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, noting no fallacy in the findings and dismissed the Revenue's ground.

Issue 2: Deletion of Disallowance under Section 40A(2)
- Facts: The AO disallowed excess interest paid to M/s Samara Automax Pvt. Ltd., a related party, comparing it to the lower interest rate on secured loans from Punjab and Sind Bank.
- CIT(A) Decision: The CIT(A) agreed that interest rates on secured loans cannot be compared with unsecured loans and directed the AO to re-compute the disallowance based on the Benchmark Prime Lending Rate (BPLR).
- Tribunal Decision: The Tribunal found that the interest rate charged by M/s Samara Automax Pvt. Ltd. was not excessive compared to market rates for unsecured loans and directed the AO to delete the addition. The Revenue's ground was dismissed, and the assessee's cross-objection was allowed.

Issue 3: Deletion of Addition under Section 68
- Facts: The AO added ?2 crores received from Shri Avinash Wadhwan under section 68, questioning his creditworthiness despite proving identity.
- CIT(A) Decision: The CIT(A) found that the assessee had provided sufficient evidence of Shri Avinash Wadhwan's creditworthiness and the genuineness of the transaction, including bank statements, income tax returns, and balance sheets.
- Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, noting no fallacy in the findings and dismissed the Revenue's ground.

Issue 4: Deletion of Addition of Interest Expenses
- Facts: The AO disallowed interest expenses, treating them as capital expenditure since the advances given for property purchases did not generate rental income.
- CIT(A) Decision: The CIT(A) found that the advances were in line with the assessee's business activities and that the funds were used for business purposes. The CIT(A) also noted a similar decision in the assessee's favor for A.Y. 2012-13.
- Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the order, and dismissed the Revenue's ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds and allowed the assessee's cross-objection regarding the interest rate disallowance under section 40A(2). The decisions were based on the detailed examination of facts, evidence, and the application of relevant legal provisions.